Business context and reporting period
inTEST Corporation designs, manufactures and markets thermal, mechanical and electrical products, primarily for semiconductor automatic test equipment (ATE), with thermal products also serving non-ATE markets. This unaudited Form 10-Q covers the three months ended March 31, 2016; comparisons are with Q1 2015 unless noted. Dollar amounts below are in millions except per-share data.
Financial performance and liquidity
| Metric | Q1 2016 | Q1 2015 / comparison |
|---|---|---|
| Revenue | $8.647 | $10.188; down 15% |
| Gross profit / margin | $4.067 / 47% | $4.918 / 48% |
| Operating income | $0.096 | $0.682 |
| Net earnings | $0.081; $0.01 diluted EPS | $0.438; $0.04 diluted EPS |
| Operating cash flow | $(0.319) | $(0.263) |
| Capital expenditures | $(0.038) | $(0.179) |
| Cash and cash equivalents | $24.951 at March 31 | $25.710 at December 31, 2015 |
| Working capital | $30.128 at March 31 | $30.205 at December 31, 2015 |
Total assets were $39.906 and stockholders’ equity was $35.682 at March 31. Current liabilities were $4.224. The filing reports no credit facilities or borrowings; it does disclose $0.350 of letters of credit secured by restricted certificates of deposit. Operating cash use reflected, among other items, a $0.907 increase in receivables and a $0.299 decrease in accrued wages and benefits. Cash declined by $0.759 during the quarter, including $0.471 used for share repurchases.
Material changes and segment trends
ATE-market revenue fell 27% to $6.069, while non-ATE revenue rose 40% to $2.578. Thermal revenue was $5.194 (down 9%), Mechanical $1.936 (down 20%), and Electrical $1.517 (down 25%). Compared with Q4 2015, consolidated revenue rose 9% to $8.647 as Mechanical and Electrical shipments improved; Thermal revenue declined 5%.
Orders totaled $9.838, down 14% year over year but up 34% from Q4 2015. Backlog was approximately $3.5 at March 31, versus $5.0 a year earlier and $2.4 at year-end; substantially all was expected to ship in 2016, but orders may be canceled or rescheduled. Segment pretax results were Thermal profit of $0.573, Mechanical loss of $0.370, and Electrical profit of $0.021.
Profitability contracted as lower revenue reduced fixed-cost absorption. Selling expense fell 10%; engineering and product development expense rose 5%. General and administrative expense fell 9%, but included a $0.099 restructuring charge; Q1 2015 included $0.320 of costs for an acquisition the company did not pursue. Excluding those items, management said G&A increased $0.059, or 4%.
Outlook, risks and unusual items
No quantified revenue or earnings guidance is provided. Management said cash and projected future cash flow should support short-term working capital needs and anticipated repurchases. It estimated approximately $0.690 of annualized savings from the January workforce reduction in Mechanical Products, while noting that restructuring efforts may not succeed and could require further cash outlays.
Management described ATE demand as cyclical, volatile and difficult to forecast, with seasonal patterns and customer-specific order timing. Other cited risks include pricing pressure, competition, customer concentration, inventory obsolescence, and reliance on a relatively small number of customers. Hakuto accounted for 15% of Q1 revenue, up from 10% a year earlier. The company also noted that repatriating some of the $1.8 held by foreign subsidiaries could trigger U.S. taxes. The 2015 share repurchase authorization permits up to $5.0; $0.625 had been spent cumulatively by March 31, including $0.471 in Q1, and shares were retired. No material legal proceedings or material off-balance-sheet arrangements were reported. Management reported disclosure controls effective at the reasonable-assurance level and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether order growth from Q4 2015 converts to shipments, especially in Mechanical and Electrical Products, and whether Thermal demand recovers.
- Whether the Mechanical Products restructuring delivers the estimated savings and improves segment profitability.
- Whether cash generation improves after Q1 operating cash use and ongoing repurchases.
- How ATE cyclicality, pricing pressure, and Hakuto’s 15% revenue concentration affect future results.
- Potential cash needs and execution risks if the company pursues acquisitions; no borrowing facility is available.